The Character of the Loan Proceeds (SP or CP) Will Determine the Character of the Property Let’s say you have $200,000 saved before marriage and kept it in a separate bank account under your own name, so this money is clearly your separate property (SP). You get married, and five years into the marriage, you decide to buy a second home and rent it with your $200,000 savings before marriage.
On your loan application, you list your own $200,000 separate assets and you list your salary as your income. Because your salary during the marriage is community property (CP), the bank relies both your separate property of your $200,000 savings and your community property salary. Here the bank relies on both community and separate property. You cannot claim that the loan proceeds are separate property anymore, and the home you buy with this loan will not be separate property. How To Avoid this Situation? If you had a premarital agreement (prenup) whereby you and your spouse agreed that your salary during the marriage is your separate property, then the loan proceeds would be all your separate property. Any property you acquire with that loan, like the second home, will also be your separate property. You do not need to worry about the lender’s or bank’s intent to rely on your separate property to secure the loan. Without such a clause in the premarital agreement, it is very difficult to prove the lender’s intention in extending the loan to you.
Just imagine you have applied for and acquired a loan 15 years ago and now you have to prove that the lender relied on your separate property and not on the community assets. Lenders are reluctant to testify. Even if you subpoena the lender, you may not be sure if that person is still in the same loan business, or if they have changed business locations. Your best option to ensure your loan proceeds remain separate property is through a waiver clause in a premarital agreement. The waiver is to ensure that the standards set forth in the In re Marriage of Grinius case does not apply to your loan proceeds. Summary of In re Marriage of Grinius In Marriage of Grinius, a couple purchased a restaurant during their marriage with two purchase money loans. The characterization of the loans, and consequently, the restaurant, as either community or separate property were disputed during trial.
This case from 1985 states that loan proceeds acquired during marriage are presumptively community property. This presumption may be overcome by showing the bank or lender intended to rely solely upon a spouse's separate property and did in fact do so. However, without satisfactory evidence of the lender's intent, the general presumption that the loan proceeds are community property prevails.
A spouse would need a written waiver to overcome this general presumption if they cannot prove the lender’s or bank’s intent when extending the loan.
For more details, read the case at: In re Marriage of Grinius, 166 Cal. App. 3d 1179, 212 Cal. Rptr. 803, 1985 Cal. App. LEXIS 1906.